Maryanov Madsen Gordon Campbell, Certified Public Accountants

Snowbirds beware: California income tax can trap you

Howard Gordon
Special to The Desert Sun
March 21, 2007

As a winter visitor you may think you don't qualify as a California resident and therefore don't have to pay state income tax, but be careful because the Franchise Tax Board (FTB) may believe otherwise.

Staying too long is only one of many signs of resident status that the FTB watches for.

Typically, you enter their radar screen when you receive an interest, dividend or similar form from your bank or stockbroker at your California address. You could also have some difficulties if you own a home here and claim the real estate tax exemption for a principal residence.

I recently became aware that the FTB is sending out "Your Income (As Estimated)" forms. The state received information from a bank showing that my client had mortgage interest expense on property in California. Now here's the interesting part - the state had no information that this person had any income in California.

It was simply assumed that since he paid mortgage interest here, he must have income here as well. In these cases, they use an arbitrary formula to determine California income: they multiply the interest paid by four. In other words, if you had $10,000 in interest expense, the FTB assumes income of $40,000 and computes your income tax based on that amount.

The FTB made it clear in it's notice that this was only an estimate, and that the taxpayer had opportunity to dispute its findings. However, it is never a good thing to have the FTB or the IRS as a pen pal. This also becomes a bigger issue if the notice has to follow you around in your travels so that you cannot answer it in a timely manner.

Residency for tax purposes in California is often in the eye of the beholder and the FTB has large eyes. Once it's determined that you're a resident, then all of your income will be taxable. This could be expensive for those of you who are from states with no or low taxes. Of course, in most cases, the state income tax you pay is deductible on your federal return.

We do have some guidelines as to who is and isn't a California resident for state income tax purposes. You're presumed to be a resident if you spend more than nine months here.

If you spend no more than six months here and have a permanent residence in another state, you will be considered a temporary resident and not subject to California income tax.

However, the state will also look at a number of other factors in making its determination. Perhaps the most important is the amount of time you spend here versus the amount of time outside the state.

For instance, spending five months here, four in Illinois and three in Washington may point to California residency even though it's less than the six months discussed above.

Other deciding factors include: location of your PRINCIPAL residence; where your driver's license was issued; where your vehicles are registered; where you register to vote; location of your bank accounts; location of your religious affiliation, social or country clubs and other membership organizations.

Since non-residents generally do not file California returns, they also do not start a statue of limitations.

This means that if you are determined to be a resident and have been for a number of years, you might be liable for the taxes on many years plus penalties. It seems to me that if you spend extended periods of time here in California, it's smart to get professional advice as to whether or not you should be filing California returns.

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